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Investment Decisions

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1. The plant has accumulated savings of $60,000 to acquire a new machine for quality assurance of its products. The new quality control machine cost $80,000. The extra $20,000 needed to acquire the new machine will be finance through a loan at 6% annual interest with the principal ($20,000) due at the end of the third year. The income tax rate is 0.35. The new equipment will save $35,000 each year and its economic life is 3 years. The salvage value is $30,000. Does the acquisition of this new machine satisfy the 6% minimum rate? Compute the after tax rate of return of this alternative for year two. Solve this problem using the straight line and the MACRS depreciation methods. Which depreciation method is best for year two?